Updated 9/20/18; Originally published 2/1/16
It is a strategy nick-named “House Hacking”, and I wish I had done it the first two homes I bought (I figured it out by the third home!)
What is it? Multi-families. E.g. Duplexes and Fourplexes.
Duplexes and Fourplexes (or Quadplexes) can be bought with traditional, residential financing (VA loan, FHA, Conventional etc.), just like any traditional single-family home, as long as you choose to live in one of the units. (Buildings with 5+ units are considered “apartments” and require much more expensive commercial loans).
This is an easy way to get started investing. You can live in one unit and rent out the others – often enough to cover most or all of your mortgage. Then, when you eventually move (usually with PCS/deployment orders or just after two years), you are earning the rent of two to four rental units.
The advantage is using owner-occupied loans instead of investment loans. Owner-occupied loans have lower rates, and much lower down payments (0%-5%) versus investment loans (25%).
I was first stationed at Ft. Sill, OK for my artillery BOLC. It was a PCS station for six months, which meant I could buy a house! I did. A small 3/2/2 single family home built in the ’70s. When I left, I turned it into a rental. Although I was cash flow negative after paying the mortgage and expenses, I reasoned that I was making money in equity and tax benefits.
I did this same thing when I got to Killeen, buying a nice 3/2/2 single family home in White Rock Estates. When I was deployed to Afghanistan in 2011, I rented it out as well. It was also cash flow negative.
I had overheard our training sergeant at the time talking about fourplexes and multifamilies, and how lucrative it had been to him to buy one, live in it, and rent the other units out. He was living comfortably for a fraction of what it would cost to buy a single family home.
That’s when I wised up. I was using my VA loans and excellent owner-occupant financing on homes that were good rentals, but not making the most of my resources. From Afghanistan, I contacted my agent about buying a fourplex when I got back. Sure enough, I contracted on a $177,000 fourplex in SW Killeen and closed a week after redeploying.
The other three units rented out were $650, $650, and $550 – a total of $1850. Figuring I would have property management expenses (10%), maintenance (10%), and vacancy (10%) for a total of 30%, I multiplied $1850 * 0.7 for $1295. My mortgage was under $1350 at the time. That is $55/mo I was spending to live in a two bedroom apartment.
When I PCSed again, back to Lawton for CCC, I rented out the unit I was in for $550/mo. Based on the same math and estimates above, I was cash flowing $330/mo after expenses.
Current Prices and Example
Unfortunately, prices have gone up since I bought my fourplex in 2012. The numbers aren’t as appealing as they were then, still recovering from the recession. But they can still make sense. A lot more sense as a purely financial investment than a plain old single family home.
Here is what I would look for and expect in 2018.
You buy a fourplex for about $230,000. Two 3 bedroom units rent for $675. Two 2 bedroom units rent for $575. Your mortgage might be around $1775/mo (both taxes and interest rates have gone up, unfortunately). You live in one of the two bedroom units and rent out the other three. Your monthly gross rent (before expenses) is $1825/mo. I plan on 30% expenses (10% vacancy, 10% maintenance, 10% management fees) and you are getting $1277.50/mo and paying a $1775/mo for your mortgage. That means you own a home for $497.50/mo. These numbers are assuming the VA loan (no money down!). It’s still very typical in our market for the seller to pay most if not all of the closing costs.
That’s not as good at the $22.75 I spent in the heyday depths of the recession. But it’s still less than the $575 you’d pay as a renter for the exact same unit. And you are paying off your loan, not your landlord’s.
When you eventually moved out and rented the unit you are staying in for $575, you would be at approximately break even.
Note, this math is always changing with the market and interest rates. If you would like to see how it would look for YOU, talk to a local recommended lender!
Obviously this strategy only works if you are happy to live in one of the units for a time. For that reason, it is often best to try when you are single or still a small family, as your family might outgrow the strategy later (there are no 4+ bedroom multi-families in our area that I am aware of).
Fort Hood in particular has a wealth of quality duplexes and fourplexes. Many if not most are less than 15 years old and in good condition.
Single Family Foreclosures
Maybe multi-families doesn’t appeal to you. Maybe being a landlord at all doesn’t appeal to you. Maybe you need more space, or a particular school.
The strategy can be applied to foreclosures as well. You can buy a single family home in need of some work for a below-market deal, fix it up while you live in it on the cheap, and then sell it for a profit when you move out. The math is quite a bit different doing this and you are usually looking to “flip” the house instead of buy-and-hold it as a rental, although it’s also very possible the numbers work well as a rental when you move on as well.
For a real-life example, I worked with some great, savvy buyers in 2016 who bought a foreclosure. They weren’t investors. They just wanted a place to stay during his time in the Army at Fort Hood. It did not need a lot of work – I estimate in the two years they were there they put less than $5000 into it.
They moved this year (2018), just two years later. We sold their home for $149,900. After their expenses and transaction costs, they took more than $40,000 in their pocket in a relatively flat market, for no other reason than they bought smart.
So, this is how you “house hack” and get your feet wet investing. I have done it myself (with an FHA loan because I had already used my VA loans). It is the perfect way to use your VA loan if you are eligible (and remember, you can use the VA loan twice!). My only regret is not having done it sooner.
If you are interested in learning more about investing in general, and the Fort Hood market specifically, I recommend starting with my Investor Tool Kit.
If this idea appeals to you in the Fort Hood/Central Texas area and you want to know more, call or text me at (512) 763-7912 or email me at firstname.lastname@example.org.